2
Motivations Enterprise risk management (ERM) help companies optimize operational decisions. Risk management and capital budgeting are two critical components of the dynamic corporate decision process. They naturally connected by the dependent risk exposures and a variety of other synergetic relationships within an intricate corporate structure It is challenging is to fully encompass the two components into the overall corporate decision making. 2

7
An Illustrative Example Consider a financial services company with a two-period planning horizon – Two business divisions: loan and insurance, each with one potential project to invest in – In period 1, both are subject to market risk – In period 2, loan division is subject to credit risk and insurance division is subject to actuarial pricing risk – These risks are dependent – The CEO makes investment decisions at the corporate level, given an initial capital budget, by maximizing her expected utility from the final resource position at the end of the two-period horizon 7